FxWirePro: USD/RUB debit call spreads for swing traders despite ruble’s undervaluation

Why call spread: An investor with a bullish mindset often deploys this strategy and wants to capitalize on a modest advance in price of the USDRUB. If the investor's opinion is very bullish on this pair, it will generally prove more profitable to make a simple call purchase. 

USDRUB is likely to resume its uptrend back again and has been continuing non-stop streak of rallies upto 71.6191 (highs of 24th August), we see limited downside risks to the dollar in the long term as the only major hitch for dollar is speculation in rate hike, so we would keep our bullish medium-term view.

On the contrary, in the long-term, we expect USD/RUB to experience a gradual move lower. We are expecting CBR to resume cutting to ease financing, which will support investment and economic growth. As of September, CBR is expecting GDP to contract 3.9-4.4% YoY in 2015 and 0.5-1.0% YoY in 2016.

The trade weighted ruble currently undervalued at 15%. According to our overshooting framework, the ruble is close to the bottom of its undervaluation, supporting our view for USD/RUB lower.

The long term trend being uptrend and we don't want to buck this trend, hence, buy 15D (1%) in the money 0.50 delta call option while shorting 7D (1%) out of the money call option for net debit.

Risk Reward profile: An investor will also turn to this spread when there is discomfort with either the cost of purchasing and holding the long call alone, or with the conviction of his bullish market opinion. Maximum loss for this spread will generally occur as USDRUB declines below the lower strike price. If both options expire out-of-the-money with no value, the entire net debit paid for the spread will be lost.